By now I assume that everyone is aware of the Facebook IPO fiasco. The lawsuits are flying like Frisbees at the dog park, alleging all kinds of wrong doings. [1] There are also numerous investment banks that have already announced losses on the IPO. [2]

We do not invest in equity IPO’s for the widows and orphans accounts. We do occasionally invest in a new bond offering, but that is not the same as an IPO by a long shot. So I did not research or perform any due diligence on the Facebook IPO. My only thought was that statistically it might perform well over the short term, but I had a hard time imagining it doing well say over 5+ years.

It seems that several pension funds took positions in the IPO. So much for stodgy, old style investments in the SP 500 equities. I am sure the pension funds are under intense pressure due to low returns since ~ 2000. Three pension funds that bought Facebook IPO shares have joined a class action lawsuit alleging the underwriters led by Morgan Stanley gave favored investors an early warning about disappointing results that Facebook was yet to make public. (Yoda is shocked beyond belief that any Wall Street firm would do this. Surely it can NOT be true.)

From a Los Angeles Times story: [3]

"We expect Facebook and the people who benefited from that sale to pay up," said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO.

The Arkansas teacher pension fund is part of a group of institutional investors that includes the Fresno County Employees' Retirement Assn. (estimated Facebook losses: $1 million) and the North Carolina Retirement Systems (estimated losses: $12.4 million). The group has filed papers seeking to become lead plaintiffs in the case.

The California State Teachers’ Retirement System (CalSTRS) currently owns 1.2 million shares at a $17 million loss. What caught my attention was their strategy:

"As a patient, long-term investor with a 30-year investment horizon we believe that over time, the stock and the company should perform well," CalSTRS spokesman Michael Sicilia said in an email.

You expect non-METARites private investors to have irrational investment expectations. You would expect that large professionally managed pension fund investors like CalSTRS would have a more reasoned, statistically valid approach to investing. University of Florida professor, Jay Ritter, is one of the leading researchers on post IPO equity performance. His latest research on all US IPOS’ from 1980 through 2010 shows that IPO’s underperformed their benchmarks by 19.7% over the first three years. This is the total return including dividend reinvestment. [4]

The questions are:

1) Does CalSTRS really think that Facebook is a buy and hold for 30 years?

Yoda does NOT have the answer to these questions. Yoda would be willing to short Facebook over the next 30 years. Yoda thinks the odds of market beating 30 year returns by Facebook are similar to the odds of being struck by lightning (1 in 1 million).

BOTTOM LINE is that IPO’s should be avoided by investors with a long term outlook.

Yoda asks “1) Does CalSTRS really think that Facebook is a buy and hold for 30 years?2) Why did CalSTRS and the other professionally managed pension funds ignore the historical IPO performance results?”

Probably Yoda’s questions were intended as rhetorical, but I’ll give them a shot.

I don’t have a direct knowledge CalSTRS; but,A.) I’ve been given to understand that many (& I believe including CalSTRS) State Retirement systems have done poorly (far below the 7.5%/annum their managers so long predicted,) and

B.) they been subject to hearing acutely the murmurings, weepings and growing anger of their system’s participants, and

C.) They “hopefully” and irrationally made decisions to “swing for the fenses” to suddenly get back to near-even.

Once in a Blue Moon(*)(**) that might have worked, but it didn’t for those desperate gamblers. They oughta been hung, but if they get away, the best that can be wished for them is may their camels never tire.

* Wikipedia A blue moon is the appearance of the third full moon in a season that has four full moons, instead of the usual three.[1] It is never visually blue. Because a blue moon occurs only every two or three years, the term blue moon is used colloquially to mean a rare event, as in the phrase "once in a blue moon".[2]

One lunation (an average lunar cycle) is 29.53 days. There are 365.26 days in a solar year. Therefore, about 12.37 lunations (365.26 days divided by 29.53 days) occur in a solar year. In the widely used Gregorian calender, there are 12 months (the word month is derived from moon) in a year. Each calendar year contains roughly 11 days more than the number of days in 12 lunar cycles. The extra days accumulate, so every two or three years (7 times in the 19-year Metonic cycle), there is an extra full moon. The extra moon necessarily falls in one of the four seasons, giving that season four full moons instead of the usual three, and, hence, a blue moon.

The term blue moon originates in folklore. Different traditions place the extra "blue" full moon at different times.

The folklore with which I grew up simply asserted that A Blue Moon was the second Full Moon in Single Calendar Month.

** The most recent Blue Moon was last week (Friday, 31 Aug 2012) – so they Do happen. The next are – expected to occur on May 21, 2016, May 18, 2019, and August 22, 2021

My only thought was that statistically it might perform well over the short term, but I had a hard time imagining it doing well say over 5+ years

You're still living in the 90's. IPO's don't "pop" like they used to (or ever did except for that anomalous time, really), and anyone who bought in on that basis is getting what he deserves.

That said, I have a hard time believing that Facebook won't have a decent business over 5+ years. (Your "30 year" metric is absurd. Microsoft may not have a decent business in 30 years. Or Starbucks. Or WalMart. Who buys with a "30 year Set and Forget" mindset?)

Let's take a consumer platform like the internet which has achieved near parity penetration with television and radio in half the time, then let's take a software which has become one if the two most used pieces of code on that platform, let's agree that people are spending vast amounts of time using it (for whatever reason), and let's acknowledge that network effects make it unlikely that a more vibrant competitor will come along in the short run - and see if we can monetize it to some degree going forward.

I am reminded that it took AOL several years to settle in a business model (and even in decline they still bill billions), that Yahoo! Has stumbled for the better part of a decade (and still bills billions), and that Google didn't know where its revenue was going to come from for several years, either. And yet they all still exist, suck up billions in advertising, and have all last "more than 5 years."

I'm not saying it's a great investment going forward, I think it could drop another 20-30% - or not, you never know with a falling knife. But to say it won't be around in five years is pretty silly, in my view.

I've heard this and variations on it over and over. But I have a hard time buying it.

What is the fiasco in the Facebook IPO? What is claimed to have gone wrong?

Did the proceeds from the IPO fail to get to the company? No.

Was there wholesale lying and fabrications in the IPO disclosures? Some are probably alleged, but none have been proven yet.

Were the shares sold not delivered to the buyers? Nope again.

Near as I can tell, the biggest problem with the Facebook IPO is that the shares didn't double in value overnight and then stay there long enough for the IPO purchasers to make a bundle of money. So what's the problem with that?

The IPO buyers (and those buying in the open market shortly after the IPO) apparently didn't do a good job in valuing the business. In the few months after the IPO, the market is saying it's not worth what they paid. Bummer for them. Maybe next time they'll do a bit more due diligence on their purchases.

If anything, I'd say the Facebook IPO was a roaring success for Facebook. They sold shares in the company for what appears to be roughly the highest price possible. That put money into Facebook's treasury which, one would hope, they are putting to good use to increase the value of the company. Had the IPO price been at today's price, Facebook would have received about 1/2 of the proceeds they actually did. And that would mean they'd have much less capital to invest in the company's growth.

But to say it won't be around in five years is pretty silly, in my view.

But no one said that...

Point made. I misquoted that from "it won't do well in 5+ years." I find that equally silly. AOL had a 10 year trajectory up (and 10 years back down, still profitable, still billing many billions per year.) Likewise Yahoo! (Both almost entirely advertising supported.)

If someone can't see a potential business model in 2 billion eyeballs, then that someone should be buying wallboard and cement company stocks. Not that there's anything wrong with those, but pontificating on internet stocks without recognizing at least an incipient business model there doesn't strike me as particularly savvy.

I should have said "But to have a hard time imagining it doing well over 5+ years is pretty silly, in my view. Maybe it won't, but I can certainly imagine it."

Point made. I misquoted that from "it won't do well in 5+ years." I find that equally silly. AOL had a 10 year trajectory up (and 10 years back down, still profitable, still billing many billions per year.) Likewise Yahoo! (Both almost entirely advertising supported.)

FB now at this juncture has more competition than AOL or Yahoo did back in the day.....just after their IPOs.....

why go to FB to advertise? Why use a social media outlet? you can advertise literally anywhere on the web for less....etc.....or more....etc.....but literally every outlet is competition....and other social media sites will be created.....

The bottom line is that FB will be less five years from now than it already is.....

If someone can't see a potential business model in 2 billion eyeballs, then that someone should be buying wallboard and cement company stocks. Not that there's anything wrong with those, but pontificating on internet stocks without recognizing at least an incipient business model there doesn't strike me as particularly savvy.

You're right, facebook isn't in the construction business. With a PE over 100 and slowing growth, it's clear that this stock should massively outperform over the next 5 years. How could it not? Anyone who thinks otherwise must be a lowercase f fool!

Peter said: What is the fiasco in the Facebook IPO? What is claimed to have gone wrong? . . .Near as I can tell, the biggest problem with the Facebook IPO is that the shares didn't double in value overnight and then stay there long enough for the IPO purchasers to make a bundle of money. So what's the problem with that?

Peter, the trading infrastructure of Nasdaq and the other exchanges failed when Facebook started trading. Investors COULD not tell if their buy/sell orders were filled or not filled. Aside from whether the underwriters gave favored clients inside information, the plumbing of the markets got clogged up. A few quotes from a Bloomberg story at the time: [1]

Facebook Inc.’s (FB) debut on the Nasdaq Stock Market turned into another setback for American equity exchanges, with the $16 billion initial public offering plagued by delays in trade confirmations, crossed quotes and signs that orders were mishandled.

The pricing of the first transaction took a half hour longer than Nasdaq planned. About 30 minutes later, the second- largest U.S. equities exchange operator reported an issue confirming trades from the opening auction with the brokerages that placed them. Nasdaq later established an appeals process for investors whose instructions weren’t carried out.

Buy and sell requests that should have been filled in the opening auction, based on the exchange’s rules, weren’t, while cancellations for other trade requests were ignored, they said. Their employers plan to appeal some of the results they received for orders sent to Nasdaq today.

Nasdaq began experiencing problems with its bid and offer quotes after the opening auction trade. By 11:31 a.m., the exchange’s highest bid, or price at which market participants were willing to purchase shares, was $42.99, and its lowest offer to sell was $42.50, according to data compiled by Bloomberg. The quotes produced a so-called crossed market, where sellers appear to be asking less than buyers are willing to pay.

Nasdaq said in a statement posted to its website at 11:59 a.m. New York time that it was having a problem delivering trade confirmations related to the IPO. “Nasdaq is working to deliver these executions back to customers as soon as possible,” according to the notice. The company said in a message at about 1:57 p.m. that the delayed messages had been sent.

So you had both retail and professional investors that could not tell if their orders were filled and at what price. As you can imagine in a rapidly moving market, it was a mess. This is the issue that led Nasdaq to offer up a $62 million settlement. [2]

There's a hell of a good chance FB won't even exist in 30 years, so why the hell those California idiots would make such a statement is beyond all rationality. They not only need to lose their jobs, but they also need to be committed to the nearest nuthouse yesterday if not sooner.

Peter, the trading infrastructure of Nasdaq and the other exchanges failed when Facebook started trading. Investors COULD not tell if their buy/sell orders were filled or not filled.

You are correct - I failed to address that issue in my post. There were clearly problems at the exchange level on the first day of trading. I don't think anyone is denying that. And as you point out, the NASDAQ is addressing those issues and proposing financial settlements to those affected by their failures.

But most of the "Facebook Fiasco" articles and headlines seem to revolve around the drop in the stock price after the IPO.

Even your OP in this thread focuses mainly on that issue: Pension funds losing money from their investment in Facebook and lawsuits over disclosures. That is a very different issue from the trading problems in the first day.

Anyone who bought the IPO of Facebook MUST have known that they face a problem with doing advertising on cell phones! This alone would have kept me at bay. Personally, I think no one deserves any money back. Of course some big investors might say something like "give me my money back or I will move my account elsewhere" but that is just hardball. The little investor like me has no such leverage. In fact one broker was so unpleased with my lack of action that they invited me to take my business elsewhere so I folded that account into my Vanguard account.

Now given a 30 yr timeline they may figure out the advertisement problem, but I am 81 and don't have a 30 yr timeline (if i ever did).